The United States is the only major country that imposes tax on a citizen's worldwide income, no matter where that citizen lives.

If you live in England, Ireland, Japan, or almost any other country, all you need to do to avoid the obligation to pay tax on your worldwide income is to leave.  After an extended period—normally one year or longer—you no longer have any obligation to pay taxes on your income outside that country (although you may continue to be subject to gift and estate taxes).

But not the USA.  To permanently disconnect from U.S. tax obligations, a U.S. citizen must not only leave the United States, but also take the radical step of giving up U.S. citizenship.  This process (from a U.S. standpoint) is called expatriation. 

If you're wealthy, giving up US citizenship or residence can save millions or even billions of dollars in future taxes.  The US$1 billion estate if an Irish citizen dying in 2008 who didn't live in Ireland pays zero gift and estate tax for all bequests outside of Ireland. The US$1 billion estate of an US citizen dying in 2008 who lived anywhere in the world pay a maximum combined gift and estate tax burden of exceeding US$450 million.

The arithmetic is almost as compelling for smaller estates.  An entrepreneur with a US$20 million estate could save over US$8 million in estate and gift taxes by giving up US citizenship.

The image of unimaginably wealthy former US citizens living tax-free in tropical paradises was (and remains) an irresistible populist target.  The result has been a series of increasingly stringent laws that put real teeth into rules penalizing US citizens who give up their US citizenship with "tax avoidance" as a principle reason.

Because these anti-expatriation rules have historically been relatively easy to circumvent, there have been periodic calls to make what critics call the "billionaire's loophole" stricter.  The latest effort to stem the flow of wealthy individuals to lower-tax havens is an exit tax enacted in 2008. 

Expatriates must now pay a tax on all unrealized gains of their worldwide estate, including most offshore trusts.  And the tax applies not only to former U.S. citizens, but also to long-term green-card holders who have resided in the United States for at least eight of the 15 years preceding expatriation. 

How are you supposed to pay the tax without selling your assets?  That's your problem—not the IRS's—although the bill permits deferral in certain circumstances.

Fortunately, the billionaire's loophole is alive and well.  This report documents numerous ways exist to legally avoid this exit tax and still take advantage of this one legal strategy to permanently disconnect from the US tax system. 

An earlier version of this report was published as "Change of Residence by Natural Persons in Light of the EC Freedoms" in Aigner/Loukota, Source versus Residence in International Tax Law (Linde 2005). The author prepared the manuscript to satisfy a requirement for the completion of a Master of Laws (LL.M) degree at the University of Vienna School of Economics and Business Administration.

The Billionaire's Loophole: Closed at Last? (2d Ed. 2008, 31 pg, US$25)

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